Connecticut Governor Puts the Kibosh on Sales Tax Holiday

December 22, 2011

Tax Analysts reports (subscription required) that Connecticut Governor Dan Malloy (D) will not support a Connecticut Republican-encouraged sales tax holiday, which is being pushed forward as a way to give back a projected $101 million state surplus.

Republican Party Chair Jerry Labriola Jr. is spearingheading the measure, claiming “this money belongs to the people of Connecticut who continue to struggle under one of the heaviest tax burdens in the country.”

That statement is certainly correct; Connecticut is a high tax state. In FY 2009, their state and local tax burden per capita was the highest in the nation at $7,256 and they ranked 47th in the 2011 Business State Tax Climate Index.

That said, sales tax holidays are a poor substitute for true tax reform. The literature shows that they do little to increase total spending (which proponents often argue produces Keynesian-style short-term stimulus), and they instead just shift consumption along the time horizon.

Sales tax holidays create unwarranted distortions in the economy, because they often favor one particular industry. They also add significant complexity to transactions, as retail outlets have difficulty changing the tax collection mechanism on computers and registers for just that time window. States are better off lowering their rate all year than settling for a politically popular distraction.

What’s more, in Connecticut, it may not even be clear that there is a budget surplus. The $101 million that Mr. Labriola claims as a surplus is actually slated to pay down state debt associated with the fiscally irresponsible “2009 Economic Recovery Notes” program, which floated bonds to “balance” the state’s budget.

If taxes are too high, lower them and cut spending accordingly. Don’t fall for silly gimmicks that kick the can down the road.

Follow Scott Drenkard on Twitter @ScottDrenkard.

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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.